Here is my response to someone in a forum that claimed that the Investment Banks are taking physical delivery of crude oil and hoarding it away somewhere:
I figured that some uninformed person would CLAIM that large spec funds are taking physical delivery of oil and just hoarding it somewhere. Of course they COULD take physical delivery of oil, but the question is: Would it be a prudent use of their clients funds to do so? And when you examine the ramifications and expense of doing so, the answer is a quick and resounding, "NO"! It is silly idea without fact or foundation for many reasons:
1) To take physical delivery, a speculator would no longer be able to use a leveraged margin account. Instead of putting up $6000 per contract, they would have to fork over $139,000 per contract at today's price. For an IB to take physical delivery of 1000 contracts, they must now fork over $139 million to pay the cash delivery price.
2) They now must find a place to store it. If Goldman Sachs has taken physical delivery of 1000 contracts, they now must find a place to store 42 million gallons of crude oil. You don't just store 42 million gallons under your bed mattress! It would be easier to just leave the oil where it is in the earth and store it there than to take physical delivery. Eventually -- and very quickly -- you would run out of storage room. At 42,000 gallons per contract, the bed mattress fills up very rapidly! Why not just BUY the oil field? It would make a lot more sense -- and cents! There would be no storage cost, and no one could accuse you of hoarding, if you just buy the oil field and sit on it!
3) Now that they have taken physical delivery, they now have purchased -- at a cash price -- an asset that no longer earns a return. It just sits there. It doesn't earn interest or a dividend. It will only provide a return when it is eventually sold. It's dead money! What kind of silly investment is that?
4) They must arrange not only for physical storage, but also transport of those 42 million gallons of oil. How many tanker trucks is that? The cost would be astronomical, especially at today's gas price, just to find enough trucks and truckers to transport 42 million gallons of highly flammable liquid to a secret hiding place.
5) Now you have to pay the astronomical cost of securing such a facility against both thieves and those who would destroy your oil. This is an on-going expense that mounts day after day regardless of whether you ever make a penny of return on your investment. Again, it is both a bad investment and a silly idea. The oil suddenly becomes and expense, rather than an asset that earns a return.
6) Where on earth are they hiding such astronomical volumes of this hoarded oil? Like I mentioned before, you can't really hide such huge volumes of a substance like oil just to hide it and hoard it from the world? Show me where all these millions of barrels of oil are all being hidden. Show me the oil! You can't hide millions of barrels of oil under your mattress or in a bank deposit box! You would have a hard time finding it (about like finding weapons of mass destruction in Iraq) because it doesn't exist. Prove all this hoarded oil exists by showing me where it is!
Note: the only people in the world that have a genuine interest in hoarding oil are the countries that have it and sell it. OPEC has an interest in hoarding it for two reasons. One reason is the reason for which OPEC was created -- to control supply and push prices higher. The second reason -- a new one that has surfaced in the past few years -- is to preserve their oil for their own people's use. In a world where oil reserves are shrinking, more and more oil-producing nations are saying that they want to KEEP their oil for themselves and the future use of their own people! I can't say that I blame them!
7) Now, you must may millions of dollars a month of rent out of pocket each month for storage costs just to sit on an asset that draws no return at all. Oil does no good to its owner unless it is refined and sold for a profit.
8) It would be a much better decision for a speculator to take their profits on their futures contract by shorting the market before taking delivery. Of course, doing this nullifies the long-only argument that uninformed people try to make to suggest that speculators are manipulating the market, for the reasons I explained in my previous post.
No reasonable investor would assume the costs and the risks of taking physical possession of millions of gallons of oil just to sit on it with the hopes of selling it later at a higher price. I don't think the Investment Banks are that stupid. The question is, are we stupid enough to buy such a silly argument?
